Other and excluded costs, borrowing costs, deferred settlement

Learning objectives

• Determine whether a cost is included (other costs incurred in bringing the inventories to their present location and condition) or excluded (abnormal wastage, storage unless necessary in the production process, unrelated administrative overheads, selling costs).L1, L2
• Explain the reference to IAS 23 for borrowing costs that may be included in limited circumstances.L2
• Calculate the cost of a purchase on deferred settlement terms and the financing element recognised as interest expense over the period of the financing.L2, L3

Normative references

• IAS 2Other costs are included only to the extent that they are incurred in bringing the inventories to their present location and condition; it may therefore be appropriate to include certain non-production overheads or the costs of designing products for specific customers.
• IAS 2 §16Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred: abnormal amounts of wasted materials, labour or other production costs; storage costs, unless those costs are necessary in the production process before a further production stage; administrative overheads that do not contribute to bringing inventories to their present location and condition; selling costs.
• IAS 2IAS 23 identifies the limited circumstances in which borrowing costs are included in the cost of inventories.
• IAS 2 §18When inventories are purchased on deferred settlement terms and the arrangement effectively contains a financing element, that element (for example, the difference between the purchase price for normal credit terms and the amount paid) is recognised as interest expense over the period of the financing.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• Corvelle buys a batch of glassware held for resale. Which of the following items are included in the costs of purchase of the batch?L2
• Calvène, a distributor of electrical equipment, imports {units} motors at a unit list price of {unit_list_price}, with a trade discount of {trade_discount_rate}%. It bears freight of {freight}, transit insurance of {transit_insurance}, directly attributable to the acquisition, and non-recoverable customs duties of {customs_duties}. Recoverable VAT amounts to {recoverable_vat}. Finally, Calvène spends {advertising} on advertising to announce that the motors are on sale. Compute the total costs of purchase of the batch and the unit cost.L3
• The cheese maker Mirandol produces {main_units} cheese wheels, its main product; the same process generates whey, an immaterial by-product. The process costs for the period amount to {process_costs}, of which {abnormal_loss} relates to milk lost following a refrigeration failure, a loss considered abnormal. Mirandol measures the whey at its net realisable value, estimated at {byproduct_nrv}, and deducts that amount from the cost of the main product. Compute the total cost of the cheese wheels and their unit cost.L4
• The commissions paid to Ombreval's sales staff to sell its finished goods are included in the cost of these inventories.L1
• At Palmyre, an incorrect press setting caused an abnormal loss of materials. The cost of this loss is recognised as an expense in the period and not included in the cost of inventories.L1
• To know whether borrowing costs may be included in the cost of its inventories, Quimperlé must refer to IAS 23, which identifies the limited circumstances in which they are included.L2
• The cheese maker Quérigny ripens its cheeses in a cellar; according to its process, ripening is a necessary stage of production, before the final packaging stage. Once packaged, the cheeses are kept in a refrigerated warehouse until they are sold. How should these two storage costs be treated?L1
• Rosmarin manufactures packaging machines. For an order from a particular customer, its engineers design a bespoke machine, which is in production at the reporting date. Which of the following costs may it be appropriate to include in the cost of this inventory item?L2
• Sorbier manufactures cosmetics. Which of the following costs must be recognised as expenses in the period rather than included in the cost of its inventories?L2
• On 1 January 20X1, Nolvène buys an inventory of steel sheets. The supplier charges a price of {price_normal_terms} for settlement on normal credit terms; Nolvène obtains the right to pay {amount_paid} on 31 December 20X1. This deferral effectively contains a financing element. Compute the cost of the steel sheets and the interest expense to be recognised over the period of the financing.L2
• Orbelle, a hardware wholesaler, buys {units} drills. For cash or at 30 days, the supplier's normal credit terms, each drill costs {unit_price_normal_terms}. Orbelle chooses an offer of a single payment of {total_amount_payable} in {financing_period} months, which effectively contains a financing element. Compute the cost of the drills to be recognised in inventory and the financing element to be recognised as interest expense over the period of the financing.L3
• On 1 March 20X1, Pellan buys reels of cable. The price for settlement on normal credit terms is {price_normal_terms}; Pellan obtains the right to pay {amount_paid} on 31 August 20X1, a deferral that effectively contains a financing element. The reporting period ends on 31 December 20X1. Ignoring VAT and the final settlement, record the entry for the receipt into inventory and the entry for the interest expense of the period.L2
• On 1 February 20X2, Quintal, a boiler manufacturer, buys copper tubes. The supplier offers a price of {price_normal_terms} on its normal credit terms, or a settlement of {amount_payable} on 31 October 20X2, the option chosen by Quintal, which effectively contains a financing element. Quintal pays a carrier {transport} in cash to deliver the tubes to its factory. The reporting period ends on 31 December 20X2. Ignoring VAT and the settlement of the supplier, record the entry for the receipt into inventory and the entry for the interest expense of the period.L3
• Tavernay manufactures garden furniture. At the reporting date, the carrying amount of its finished goods inventory, 300,000, includes 18,000 of rent for the warehouse where the finished furniture awaits sale. What is the error?L2
• Ulmière buys spare parts, payable 110,000 in 24 months; the supplier's price for settlement on normal credit terms is 100,000. The deferral effectively contains a financing element. Ulmière recognises the inventory at 110,000. What is the error?L3
• Rivaldi manufactures, for a particular hotel, a set of furniture designed specifically for it; the order is in progress at the reporting date. Costs incurred: materials used 40,000; direct labour 25,000; production overheads allocated 15,000; design of the furniture for this hotel 6,000; wood wasted through a faulty setting, a loss considered abnormal, 3,000; commercial presentation to other hoteliers 2,000; storage of finished pieces not necessary for the rest of the manufacturing 1,000. Rivaldi considers that these design costs help bring the order to its present condition. What is the cost of the inventory at the reporting date?L2
• Sorlan incurs two administrative costs: 90,000 for the management and administration team of its factory, and 140,000 for the group finance department, which plays no part in production. How should these costs be treated in measuring inventories?L2